Perth-based engineering and services company, Forge Group (FGE), is struggling to stay alive, judging by an update released to the market on Monday and buried in a request for an extension of the voluntary suspension that has already seen the company’s shares off the lists since November 4.
Forge says it anticipates releasing the revised earnings guidance and details of a capital raising next week – just which day remains uncertain.
But it is clear the company won’t see its share price at $4.18 (its final close on November 2).
Forge requested a halt in trading a fortnight ago last Monday because of problems which had emerged at two gas turbine power station projects, and two days later turned that into a voluntary suspension to allow it time to get more details on the problems and their financial impact.
Forge then requested a further extension last week as rumours emerged that it was lining up a quick fund raising.
Now in the latest statement that company said that it is looking at big losses as a result of the two power station contracts.
"As a result of losses incurred at the Diamantina Power Station (DPS) and West Angelas Power Station (WAPS) projects, Forge expects a material diminution in FY14 earnings," it told the ASX.
It said it "confirms that all existing banking facilities remain in place and it is working quickly to put in place additional arrangements that will minimise the impact of the DPS and WAPS project losses on Forge’s financing arrangements and provide Forge with greater financial flexibility".
Forge said that its bank, the ANZ, "continues to support the Company by way of the existing banking facilities". Companies that want to reassure investors only talk about the support of their bankers at times like this.
That in itself is an indication of how delicately poised Forge’s financial position must be.
"In order to strengthen its balance sheet and in support of any additional arrangements from ANZ, Forge is exploring a range of potential financing options, including an equity capital raising," the company said in its ASX statement.
"As a result of Forge’s voluntary suspension lasting more than five business days, Forge applied to the Australian Securities and Investment Commission (ASIC) for relief to permit it to conduct a “low document” accelerated rights issue in accordance with section 708AA of the Corporations Act.
"ASIC has declined to provide this relief and Forge is therefore required to prepare a prospectus in accordance with section 713 of the Corporations Act. Forge is working to prepare this document as quickly as possible.
"In the meantime Forge confirms that the underperforming DPS and WAPS projects have been quarantined from normal business operation under new project management, and Forge is working actively with clients on implementation of recovery plans to ensure scheduled completion. Forge also confirms all other parts of the business are trading as normal.
"Forge has entered into negotiated agreements with the customer and key sub-contractor at the DPS project that address certain identified commercial issues and align and extend scheduling completion dates.
"The Board is of the view that it will be unable to meaningfully update the market further until it is able to successfully complete these arrangements, therefore Forge presently expects to stay in suspension pending an announcement regarding the finalisation of the proposed financing and its revised FY14 earnings guidance, which it currently anticipates making in the week beginning Monday, 25 November 2013."
In other words, a whacking great loss is expected from the company and the issue will be done at a deep discount to that $4.18 last sale.
FGE YTD – Forge heading for massive change next week
The company’s ability to meet existing contract requirements and win new contracts, will be a key part of the refinancing and fund raising.
It recently won a share of a $1.47 billion engineering contract for the Roy Hill iron ore mine of Gina Rinehart’s Hancock group in WA.
Forge’s share of that deal was estimated by the company at $830 million, so there is a lot of revenue and potential earnings to support.
Without a strong balance sheet, the company might not be able to complete the deal.
In the year to June 30 this year, Forge earned a net profit after tax of $62.9 million, up 28% on the 2011-12 result of $49.3 million.
Net profit before tax was $90.1 million, (2011-12: $70.1 million). Earnings before interest, tax, depreciation and amortisation increased 31% to $116.5 million (2011-12: $89.2 million) and revenue increased 36% to $1.1 billion.
At June 30 the company had cash and deposits of nearly $104 million and not much obvious debt (around $11 million) on the balance sheet.
But it had used $307 million of bank guarantee and insurance bond debt for its various contracts. That needs to be protected. for without that debt many of the contracts might be lost or fall over.
But the near $104 million of cash available tells us that the company has either chewed that up since June 30, or will need a lot more to restore its capital strength.
The losses on the two power station contracts must be horrendous.
And then will come the required management and board changes because this company’s threatening situation required a proper explanation for shareholders.
